The Subscription Trap
How can companies make more than a billion dollars selling a service that almost no one wants? By signing up millions of members who don't know that they're becoming members.
A survey by credit card company Visa estimates that nearly three in ten Americans have been stung by a subscription trap. Here's how it works: You buy airline tickets or flowers or a digital camera at a site like Orbitz, US Airways, or FTD--and just when you think you've completed your transaction, you get an offer for cash back or free shipping. So you click the button, and a screen appears asking for your e-mail address in exchange for that attractive little benefit. It seems like a small price to pay, so you comply and then finish your purchase.
Three months later, as you review your credit card statement, you discover that you've been dunned for $50 in membership dues by some company you've never heard of, for a club that you never knew you belonged to and that you've never received any benefit from. (Even when the offer promises something like cash back or free shipping, those promises often apply to your next purchase, not the one you just completed).
Unfortunately, getting your money back isn't easy. According to some angry consumers, getting a full refund required writing a letter (the old fashion way) and waiting months to receive a credit card chargeback.
Welcome to the world of posttransaction marketing, a billion-dollar industry that most people have never heard of. (For a slideshow presentation of posttransaction marketing in action, see "How Subscription Clubs Bring in Members.")
In 2009, the U.S. Senate Commerce, Science and Transportation Committee, headed by Jay Rockefeller (D-West Virginia), began an investigation of the industry (the investigation is ongoing). According to the committee, the three biggest players in this business, Affinion Group, Vertrue, and Webloyalty--all based in Norwalk, Connecticut--have earned (at a conservative estimate) $1.4 billion in revenue over the past 10 years. They shared more than half of that money with their hundreds of Website partners, including such widely respected companies as Avon, Barnes & Noble, Budget, Buy.com, Classmates.com, GMAC Mortgage, MovieTickets.com, Priceline, Shutterfly, Staples, and Ticketmaster.
In return for their cut of the action, these big-name companies commonly pass consumers' credit card information to the posttransaction marketing firm--unbeknownst to many of the affected consumers. At one site, all you have to do to trigger the handoff is to type your e-mail address: Even if you never click a Submit button or press Enter on your keyboard, your billing data goes flying from one company to another.
Within the posttransaction marketing business, such an exchange is called a data pass. Though some consumers consider it a betrayal of their trust, it is certainly lucrative. The Senate Commerce Committee's interim report (PDF) lists Comcast, Orbitz.com, and Priceline.com (which operates Fandango) among 19 retailers that have made more than $10 million each from partnerships with the three marketing businesses over the past 10 years. One merchant, United Online, the parent company of Classmates.com, has earned $70 million via Affinion, Vertrue, and Webloyalty, according to Senate investigators. Shutterfly has made $6 million over past 10 years from these partnerships, the report says.
Convenient or Confusing?
Many observers believe posttransaction marketing is a business model built on deception.
David Murray, a Massachusetts hospital executive, inadvertently enrolled in Affinion's $12-a-month LiveWell health-related membership program when he made a purchase at 1-800Flowers. He concedes he erred by clicking on a '$15 Cash Back' button, but he insists that the offer was presented in a "deceitful" way.
"The order confirmation stated 'Your purchase is complete. Click here to claim $15.00 Cash Back on this purchase!' This is not true. 1-800Flowers isn‘t offering $15 back, LiveWell is. And who the hell is LiveWell?" Murray says.
Murray complains that the data-pass process obscured the fact that he was actually making a separate new purchase of a LiveWell membership. "I have an old saying: ‘It may be legal, but is it moral?' Well, I don‘t think it‘s legal. And I know it wasn‘t moral. Is this really something 1-800Flowers wanted to be associated with?"
Apparently not. Company spokesperson, Joseph Pititto, says, "We reviewed the programs and notified the partner we are not renewing our contract." He says that fewer than 2 percent of customers complained to 1-800Flowers about Affinion membership programs.
Senator Rockefeller is among the most outspoken critics of posttransaction marketing. "These companies use aggressive sales tactics intentionally designed to mislead online shoppers," he says. His committee's investigation has put the industry's Big Three firms under a microscope.
"There are more than 4 million American consumers whose credit cards are being charged by mysterious membership clubs after shopping online, and most of these 4 million consumers don't even know it's happening," Rockefeller claims.
Officials for Affinion, Vertrue, and Webloyalty all bristle at the charge that they mislead customers. In the past, each has claimed that its offers are clear and their details are conspicuous. Their policy of obtaining your credit card data from a merchant that you just finished doing business with isn't sneaky, they argue: It's a convenience to you.
Affinion, which runs more than two dozen membership programs including Buyers Advantage, Travelers Advantage, and Identity Secure, did not respond directly to Rockefeller's comments, but company spokesperson James Hart says, "Affinion is proud of its long-standing history of employing the best marketing practices in the industry...our programs provide tremendous value for millions of consumers worldwide." According to Hart, Affinion's marketing terms are explicit and require consumers to give "informed consent" before they join one of the company's membership programs.
Online marketing expert Ben Edelman, an assistant professor at Harvard Business School who testified at the Senate Commerce Committee hearing last year, believes that posttransaction marketing uses "bait and switch" sales techniques and is deliberately deceptive.
"Most consumers have no idea they're even enrolled in these programs or how a third party got hold of their credit card number," Edelman says.
Making It Clearer
In January, in response to the Senate Commerce Committee's investigation, Affinion, Vertrue, and Webloyalty agreed to alter their online offer pages. Instead of collecting credit card data directly from the host Website where the offer appears, the companies now require consumers to enter their 16-digit credit card information a second time to establish a membership (and to receive any special cash-back or rebate offer).
Since Webloyalty began requiring consumers to input their credit card numbers a second time, the company has seen a drop in enrollments, spokesperson Beth Kitchener says, though she declines to specify how big the drop has been. "If there is confusion about how people enroll in our programs, we are happy to address those concerns," Kitchener says. "We don't want customers who don't want us."
Rockefeller says that requiring consumers to input their credit card numbers twice is a "step in the right direction," but he still views the companies' offers as misleading and is pushing for further changes in their business practices. Moreover, because the three companies adopted the change voluntarily, other firms that engage in posttransaction marketing need not follow their lead.
Seeing for Ourselves
During a shopping excursion at Spiegel.com, I discovered how easy it is to mistakenly sign up for a membership program. After I made my purchase and progressed to the order summary page, a window offering "free shipping" popped up. Looking closely, I realized that that the offer didn't apply to my current purchase; instead, it was good for my next purchase at Spiegel.com and came "Compliments of Spiegel Privilege Pass." I clicked 'Continue' and found myself on a Web page that stated prominently at the top "Claim your Free Shipping Certificate Now!"
At the bottom was a text field instructing me to enter an e-mail address as an "electronic signature" agreeing to "activate your privilege pass membership." In the lower left-hand corner of the browser was a gray box with text that in several browsers appeared slightly blurry spelling out the "Offer Details." The details explained that "activating your membership" meant agreeing to pay a $1.95 "activation fee"; furthermore, if I didn't cancel my membership within 30 days, the club would begin debiting my credit card at a rate of $14.95 per month.
What happened next surprised me. I typed my e-mail address in the text field--but before I clicked anything else or pressed Enter on my keyboard, the Web form seemed to register my e-mail address automatically and jumped me to a page welcoming me to Privilege Pass. This page said that within 24 hours, I would receive a confirmation e-mail, a "Shipping Certificate," and a user ID and Password to access my Privilege Pass benefits. When the confirmation e-mail arrived, it included no mention of fees associated with membership and no instructions on how to cancel.
Privilege Pass is a discount membership program that offers discounts on travel- and entertainment-related purchases. The program is run by Encore Marketing International, a privately held company in Lanham, Maryland. The company did not reply to repeated e-mail and telephone requests to be interviewed for this story.
Representatives of Signature Styles, the owner of the Spiegel brand, say that it has not received many complaints about the way its partner markets the Spiegel Privilege Pass. Spokesperson Parker Block says that Signature Styles is currently in discussions with Encore Marketing International to update the way Spiegel's Web site enrolls consumers in the Privilege Pass monthly subscription membership. "We are developing a ways to be more transparent to consumers to make their experience more satisfying to government, consumer advocacy groups, and consumers," Block said. The company will change the process in the near future, he said.
Some Partners Cut Ties
The vast majority of retail Websites I interviewed that work with Affinion, Vertrue, and Webloyalty say that they work hard to build a positive relationship with customers and don't want to tarnish it through deceptive practices. But since the Senate Commerce Committee investigation began, only 8 of the estimated 450 companies that partner with the Big Three--Air Tran Airways, Continental Airlines, Fandango, Intelius, 1-800Flowers.com, Priceline.com, US Airways, and Vistaprint--have publicly announced that they will no longer allow companies to make misleading pitches during the checkout process on their Websites.
Both 1-800Flowers and US Airways say that they won't be renewing their contracts with Webloyalty. Priceline and Vistaprints say that they will no longer work with Affinion. Intelius says that it no longer works with Vertrue.
Both Allposters.com and MovieTickets.com continue to offer pitches for club memberships on their sites. MovieTickets.com dangles a "$20 cash back incentive" in exchange for trying Webloyalty's Reservation Rewards program (which offers dining and travel discounts). AllPosters.com plays up a $15 coupon in exchange for trying membership in Webloyalty's Shopper Discount and Rewards club. Both sites ask you to enter your credit card information a second time to acknowledge that you are joining a club, and both explicitly warn that you'll be charged if you don't cancel your membership within 30 days.
Spokespeople for a number of companies told me that they don't believe posttransaction marketing confuses or entraps their customers, but Rockefeller says that the results of his committee's investigation show otherwise. "The interviews and the e-mail communications provide abundant evidence that the e-commerce partners are aware that their customers are being misled by the enrollment offers from Affinion, Vertrue, and Webloyalty," the committee's report states.
Even more scathing is a study that the Senate investigation unearthed from Webloyalty as part of a subpoena for information. According to internal company documents, Webloyalty surveyed 243 of its Reservation Rewards members and found that 76 percent of them either didn't recall being offered a Reservation Reward membership or said that they had declined a membership offer. The survey was conducted before Webloyalty began asking customers to enter their credit card data a second time to sign up for its programs.
The commerce committee report also included an e-mail message in which a Vertrue employee estimated that "cancellation calls represent approximately 98 per cent of call volume" to the company's customer service center.
A review by the Better Business Bureau of numerous complaints against these companies indicates that many consumers charged for club membership said they were unaware they had given these companies their billing information.
Financial information that the companies provided to the Senate Commerce Committee reveals that the Big Three (Affinion, Vertrue, and Webloyalty) and their e-commerce partners have generated more than $1.4 billion in revenue over the past 10 years from Internet consumers who have been charged for membership programs. Of the $1.4 billion in total revenue, $792 million went to the e-commerce retailers.
My review of the posttransaction marketing companies' financial information indicates that their revenues may have been considerably higher. For instance, Webloyalty reported revenue of $193 million in 2007 alone, according to the most recent numbers available; and in that same year, Vertrue announced that it was projecting revenue of $800 million. For its part, for the third quarter of 2009, Affinion reported in excess of $184 million in revenue from its Membership Products segment. Those numbers suggest that combined revenue for the three firms may now be close to $1 billion a year.
No Strangers to Courtrooms
Rockefeller isn't the only politician to have gone after Affinion, Vertrue, and Webloyalty. Affinion has been sued by the attorneys general of 16 states acting in concert, and by the attorney general of Florida (PDF) separately. In 2008, the company paid $25 million to settle a nationwide class-action lawsuit for allegedly billing and collecting unauthorized charges from consumers for products or memberships that consumers never requested or consented to receive. (Some of those incidents dated back to years before 2005, when Affinion was known as Trilegiant.)
Webloyalty is currently under investigation by the attorney general of Connecticut. In 2009, Webloyalty agreed to settle a class-action lawsuit in which plaintiffs alleged that the company had defrauded them. As part of the settlement Webloyalty agreed to adopt a number of changes to the way it markets its loyalty programs, as well as to pay $10 million to consumers who had inadvertently signed up for its membership clubs.
Over the past nine years, Vertrue, which changed its name from MemberWorks in October 2004, has been sued by the attorneys general of California, Florida, and Iowa. Each suit involved similar allegations that the company had deliberately misled customers or charged them without their knowledge.
In January, New York attorney general Andrew Cuomo issued subpoenas to 22 e-commerce retailers--Avon.com, Barnes & Noble, Budget, Buy.com, Classmates.com, Columbia House, Expedia/Hotels.com, FTD.com, Gamestop/EB Games, GMAC Mortgage, Hotwire.com, Intelius, MovieTickets.com, 1-800Flowers.com, Orbitz.com, Pizza Hut, Priceline.com, Shutterfly.com, Staples.com, Ticketmaster.com, Travelocity, and Vistaprint--seeking information on their dealings with Affinion, Vertrue, and Webloyalty. Cuomo says that these "well-known companies are tricking customers into accepting offers from third-party vendors, which then siphon money from consumers' accounts."
Who Has Your Back?
Some people, including Senate investigators, believe that the government shouldn't be the only entity looking out for consumers' interests in these cases. They think that credit card companies American Express, MasterCard, and Visa should do a better job of policing posttransaction marketing.
The argument goes like this: The credit card companies undoubtedly receive many requests from customers to reverse charges from Affinion, Vertrue, Webloyalty, and similar companies. (Each company declined to discuss how many times they have received chargeback requests from customers disputing a charge from them.) Credit card companies have rules for dealing with merchants whose customers frequently ask to have their charges reversed. Offending merchants are subject to fines or even removal from a credit card's network.
In the wake of the Senate Commerce Committee's initial report, American Express spokesperson Lisa Anselmo says that her company is scrutinizing the way Websites pass credit card information to Affinion, Vertrue, and Webloyalty. "We share the committee's concern and are investigating alleged unfair and deceptive practices," Anselmo said. "A merchant can't just transfer information to a third party."
MasterCard declined a request for an interview, instead releasing this statement: "We are investigating online marketing practices by certain merchants. As part of this investigation, we have notified the banks that provide acceptance services for these merchants that they must take action against merchants violating MasterCard rules."
Visa officials refused to comment specifically about Affinion, Vertrue, and Webloyalty, beyond saying that the company is cooperating with the Senate Commerce Committee's investigation. A Visa spokesperson says that the company has a zero tolerance for fraud. If consumers feel that they were tricked into a charge, they should request a chargeback and Visa will investigate, the spokesperson said.
How to Avoid Getting Hooked
You'd think that not joining a club would be the easiest thing in the world. But at many sites, consumers regularly get sucked into signing up for discount shopping clubs that they have no interest in joining. Here's what to look out for:
* When you see words such as "free," "cash back," and "rebate" on a Web site, alarm bells should ring in your head--no matter how credible the site. Take a deep breath before clicking to take advantage of any such deal, and read all of the terms and conditions carefully. Too often, accepting a "cash back" offer turns into a costly mistake.
* If the terms and conditions are confusing, the company may have buried something in them that it doesn't want you to find. Skip it!
* When completing a purchase online, look for prechecked boxes that may bind you to terms and conditions you don't want. Uncheck those boxes.
* Don't shop online with your bank debit card. Credit card companies such as American Express, MasterCard, and Visa are protected under the federal Fair Credit Billing Act. When you dispute a charge on your credit card, you can ask your credit card company to withhold payment while it investigates. You don't have the same protections with a debit card purchase.
How to Quit a Club You Never Meant to Join (and Get Your Money Back)
Hundreds of big-name Web sites offer shoppers discounts or free shipping if they'll join a discount club that charges a monthly membership fee. Joining these clubs is so easy that many people don't even know they've done it. Getting out of the club--and getting your money back--is the hard part.
Here are the most effective steps to take to get your money back from what are known as posttransaction marketers.
1. Call the billing company. First contact the company that is directly billing you--not the Web site that presented the original offer. Be polite, ask to cancel your membership and demand your money back. If the representative refuses to refund your money or claims to be unable to, ask to talk with a manager. Note the date and time of your call and the names of all the service representatives you speak with. Getting nowhere? Inform the company you are going to dispute the charge with your credit card company.
2. Call your credit card company. American Express, MasterCard, and Visa offer their credit card customers fraud protection and will investigate claims of bogus billing. Lodge a formal claim with your credit card company, explaining that a posttransaction marketer billed you for a service that you mistakenly signed up for or were not aware you had requested. Emphasize that you've tried to get your money back from the billing company with no success.
Thanks to a high-profile Senate Commerce Committee investigation, companies that engage in posttransaction marketing are currently under a microscope, and credit card companies say that they are willing to investigate and reverse these charges.
Web Shopper: $10 Back Led to $45 Gone
Restaurant.com's slogan is "eat, drink, save money," but don't tell that to Bellingham, Washington, resident Kari Glennon. She thinks the site's motto should be "eat, drink, and watch out for surprise charges on your credit card bill."
Glennon's problems began in October 2008, when she bought several Restaurant.com gift certificates for her coworkers. The next month she noticed a mysterious $14.95 charge on her Visa credit card statement for "Shopping Essentials." Glennon shares the account with her husband and assumed that the charge was his. Three months later, she realized that she'd now been charged the same amount three months in a row, so she decided to investigate.
Glennon called a toll-free phone number that she found online for Shopping Essentials and discovered that it was a shopping club owned by Norwalk, Connecticut-based Vertrue; the club offers discounts on department store gift cards and charges members $14.95 a month for belonging to it.
"I told the woman on the phone I had no recollection of joining the service," Glennon said. The rep told her that the charges originated from her Restaurant.com purchase. "But how did you get my credit card number?" she asked. The representative told her that Restaurant.com had given the credit card data to Vertrue after she had clicked on a "$10 cash back" banner ad and input her e-mail address.
"I don't recall clicking on anything, and I did not give my credit card information to Restaurant.com for the purpose of signing up for a membership," Glennon says. "I felt taken advantage of."
Millions of unsuspecting online shoppers have had experiences similar to Glennon's, according to investigators examining similar marketing offers at hundreds of mainstream Websites.
Sharing credit card information between companies may be controversial, but it's still perfectly legal--for now. However, the business of posttransaction marketing has caught the attention of the U.S. Senate Committee on Commerce, Science and Transportation, which launched a probe last year to determine whether this type of marketing should be banned. [Here is a long (2 hours, 15 minutes) video of the committee's hearing on "Aggressive Sales Tactics on the Internet and Their Impact on American Consumers ."]
Thousands of consumers have complained to the Better Business Bureau, saying that they, like Glennon, inadvertantly became members of a Vertrue service despite having no memory of signing up for it.
In response to the Senate committee's investigation, Vertrue earlier this year voluntarily modified its marketing offers so that prospective club members must now input their credit card number a second time to confirm that they want the membership.
Restaurant.com spokesperson Tony Bombacino says that his company cut ties with Vertrue in November 2009 after the Senate committee began investigating the business practices of major posttransaction marketers Affinion, Vertrue, and Webloyalty. "We felt it would be best to end our relationship and find out what the Senate investigation concluded," Bombacino said.
Restaurant.com has an A+ rating with the BBB, according to Bombacino. He also says the number of complaints that his company received from customers about its relationship with Vertrue was low. Vertrue has an F rating with the BBB because of a "failure to honor commitment to arbitrate or mediate disputes," according to the BBB.
When Glennon asked Vertrue for a refund, its representatives told her that they could credit only the most recent charge back to her Visa account. If she wanted the outstanding $29.90, they told her, she would have to mail the request to Vertrue's postal address, and the refund might take up to six weeks to arrive. She says that she received it three weeks later. Representatives at Vertrue declined to comment on Glennon's experience, but they say that the company has always allowed members to cancel an account and receive a refund over the phone.
"I got my money back," Glennon says. "But what about all the [Shopping Essential] customers who are still paying $14.95 a month for a service they don't even know they signed up for?"
Vertrue says that it is cooperating with the Senate committee investigation and making changes to its business.